For an investment ending at time T we denote the net cash flow at time t by c_t and the net rate of cash flow per unit time by ρ(t). The present time is t = 0 and time is measured in years.
An infrastructure fund considers the construction of a new bridge. It estimates that the project will require an initial outlay of £22.475m = £22,475,000 and a further outlay of £10m after one year (m = million). There will be an estimated inflow of toll charges of £1m per annum payable continuously for 47 years, beginning at time t = 3.

Task: Suppose that the infrastructure fund now wants to adjust the above cash flows to account for a constant rate of inflation e of 1% per annum. The fund can borrow at an interest rate of 1.5% per annum. Calculate the net present value at this interest rate, allowing for inflation. Is the yield i^e₀ allowing for inflation larger or smaller than 1.5%?

Answer rating: 100% (QA)

The net present value of the project at t0 is 545175101 which is a positive number As per NPV rule the project would be profitable if its NPV is a pos... View the full answer